Up In Smoke: What Happened to the Tobacco Master Settlement Agreement Money?

The WasteWatcher

December 12, 2017 — Spencer Chretien

In November 1998, forty-six US states, along with the District of Columbia and five US territories, and the major tobacco companies entered into a contract of an extraordinary nature. (The other four states, Florida, Minnesota, Mississippi, and Texas, had entered similar agreements on their own beginning the year before.) The agreement, known as the Master Settlement Agreement (MSA), represented the culmination of a decades-long argument between the tobacco companies and state governments. After the dangers of smoking became known, the tobacco industry had engaged in extensive efforts to somehow stay in business, deflect and defeat lawsuits, and minimize negative attention. Public healthcare systems—and most of the healthcare in this country is taxpayer-funded or subsidized—had seen an influx of patients with smoking-related diseases, and state governments began filing lawsuits against the tobacco companies, claiming they wanted money to help cover smoking-related healthcare costs. The tobacco companies had lots of money but were nervous about the states’ potential to sue them out of business. So, they decided to talk. The result was the MSA.

Under the agreement, the tobacco companies would make payments, forever, to state governments. These would cover the costs of smoking-related illnesses. The amount paid by the tobacco companies would directly correlate to the number of cigarettes sold—the more cigarettes sold, the more money the states would get. In exchange for their money, the tobacco companies would not be sued by state and local governments seeking recovery of costs associated with tobacco use. All such ongoing lawsuits were settled by, as its name suggests, this settlement. There were other parts of the agreement, too: restrictions on tobacco advertising, the closure of the tobacco industry’s trade association, increased funding for anti-smoking campaigns, and support for farmers whose tobacco profits were expected to decline as a result of the MSA, to name a few. But the most important components, by far, were the payments from the tobacco companies to state governments and the end of state and local lawsuits against the industry.

Nearly twenty years later, the tobacco companies have paid a staggering $119.5 billion to the states and territories participating in the MSA and another $25.4 billion to the four states with their own agreements. What have the states done with this huge amount of money?

As is often the case, state governments spent this money on purposes other than what was designated. Since the adoption of the MSA, states have turned to the constant stream of their tobacco windfall to do nearly anything they want. Spending on smoking-related healthcare costs and reducing and preventing tobacco use has represented but a fraction of state expenditures relating to the MSA.

The Government Accountability Office reported in February 2007 that 22.9 percent of proceeds from the settlement during Fiscal Years 2000 to 2005 had gone to close state budget shortfalls; 7.1 percent had been spent on “general purposes;” and 6 percent on the politically popular term “infrastructure.” Other notable highlights were that 11.9 percent of funds were “unallocated” and 7.8 percent had been devoted to “Other.” Barely more than a third of the settlement revenues had been spent on health and tobacco control.

In October 2014, the New York Timeshighlighted some lowlights: millions of tobacco dollars spent on shipping docks in Alaska; on a county building and jail in New York; and, “in the ultimate irony,” $42 million to North Carolina tobacco farmers—“for modernization and marketing,” not to compensate for losses due to declining smoking rates.

A National Institutes of Health study in December 2014 sounded the alarm. The study found that “higher MSA payments are associated with weaker tobacco control environments across states” (emphasis added). It recommended that policymakers “focus on utilizing MSA payments strictly on tobacco control activities across states” and posited that one reason for the negative relationship between MSA payments and tobacco control is because of the actions of state legislatures that have diverted MSA payments towards non-tobacco control activities. Politicians who use the settlement funds for their extraneous projects may be significantly hampering public health.

Besides politicians’ quintessential habit of spending money on things it was not meant for, there is a more insidious way that they have taken advantage of the never-ending stream of money from the tobacco companies. This is called securitization, and it occurs when a cash-strapped state borrows against promised future MSA payments so that it can get the money immediately. The state issues bonds backed up by the promise of future payments. The term “tobacco bonds” is a reference to this irresponsible practice. The buyers of bonds (the most prominent of which are powerful financial institutions) make a handsome long-term profit. State governments and their taxpayers get a raw deal. As the Campaign for Tobacco-Free Kids warned as early as 2002, states that securitize their tobacco funds get much smaller total payments, “usually for about 40 cents on the dollar or less,” than they would if they let the future revenue come in as planned. Borrowing against future payments in exchange for less money today leads to fewer resources for public health and more money for Wall Street. Yet politicians openly turn to the MSA revenue to cover for their irresponsible spending. For example, in November 2017, as Pennsylvania tried to balance its budget shortfall that had been caused by a refusal to eliminate wasteful spending, securitizing tobacco settlement revenue was the preferred course of all parties. Unfortunately, even some otherwise fiscally responsible politicians like to securitize tobacco revenue, as they consider it a better option than raising taxes.

The Tobacco Master Settlement Agreement simultaneously represents one of the most egregious examples of a government shakedown of private industry and offers a case study of the problems that stem from big government and big business scratching each other’s backs. It has turned the largest tobacco companies into an indispensable cash cow for politicians and bureaucrats, enabled irresponsible state spending, and, amazingly, has resulted in less money for public health and tobacco control while propping up a declining industry. As is the case with discriminatory tobacco taxes, the incentives of the MSA are perverse: the more people smoke, the more money the government gets to spend on whatever it wants. The biggest losers are those with tobacco-related diseases and smokers trying to quit.